Executive Summary

Hundreds of billions of dollars are lost each year because the United States taxes economically productive resources such as capital and labor. Pollution taxes offer an alternative source of revenues that reduce these losses and reduce pollution.

Focusing on taxes designed to reduce the risks of climate change -- carbon taxes -- this report explores the main components of a tax-reform strategy that promotes environmental improvement. Key elements of the authors' proposal include returning carbon tax revenues to the economy by reducing other taxes, compensating households or specific regions hurt by additional energy tax payments, and enesuring that the tax reduces carbon dioxide emissions as inexpensively as possible. The authors conclude with specific suggestions for using these principles to guiede the design of a U.S. carbon tax strategy.